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Tuesday, 10 July 2012

The review, completed by the international consultancy IFAAS (Islamic Finance Advisory & Assurance Services –www.ifaas.com), was commissioned by the Senegal Ministry of Finance with the full support of the Islamic Development Bank (IDB), based in Jeddah, Saudi Arabia.

IFAAS, with the support of local taxation and legal experts, undertook a comprehensive review of the entire region’s financial sector and the regulations pertaining to the banking, insurance, microfinance, securities and capital markets industries. Senegalese tax laws were also reviewed to identify potential barriers that may impede the development of Islamic finance in Senegal and the UEMOA region.

The review was completed by IFAAS in close consultation with the relevant local and regional authorities and the findings were presented last week at a two-day workshop in the Senegalese capital, Dakar. Over 80 senior officials from various authorities of the UEMOA member countries attended the workshop organised by the Senegalese Ministry of Economy and Finance and supported by Islamic development Bank.

During the workshop, IFAAS set out a roadmap of the regulatory changes required to facilitate the introduction of Islamic financial services across the region. With similar experience in several other regions, IFAAS has recommended a phased implementation of the required changes. This is to be supported by a pragmatic and progressive approach in order to avoid destabilising the existing financial system. The proposed approach also aims to ensure a level playing field for Islamic finance providers across all eight of the UEMOA countries.

Mrs. Oulimata Diop, Director of the Money and Credit Directorate of the Ministry of Economy and Finance of Senegal, thanked IFAAS for their high quality of work in her address during the closing ceremony and stated that “The integration of Islamic finance into the regional financial system is very much possible on the basis of the current legislation. […]This finding is highly reassuring for the stakeholders that the implementation of Islamic finance in the region will not require highly complex reforms. IFAAS recommendations are very pragmatic and simple to follow.” The representatives of the relevant authorities from different countries of the UEMOA region also expressed their satisfaction with the results and recommendations presented by IFAAS.

Farrukh Raza, Managing Director of IFAAS said, “It is an honour for us to have led this exceptional project. We are convinced that our report will provide a solid platform for establishing a sound Islamic financial industry in the region, providing innovative solutions to the public and the states of the West African union.”

*Members of the West African Economic and Monetary Union (also known by its French acronym, UEMOA) are Benin, Burkina Faso, Cote d'Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo.

Despite tremendous growth in Islamic banking and finance globally, it is not easy to convince Pakistani bureaucrats and policymakers that this new form of banking and financial business can potentially be used to run economic and financial matters of the Pakistan economy in a Shariah compliant way.

In fact, a number of sceptics of Islamic banking & finance argue that Islamic financial products are in essence similar to their conventional counterparts and that Islamic banks do nothing but mimic conventional banks. This observation has some merit. Islamic financial products seem to mimic conventional products in terms of pricing and their financial behaviour and economic characteristics. This is primarily because financial regulators treat Islamic products similar to the conventional products and emphasise that the two sets of financial products must not differ much in terms of their risk return profiles and financial characteristics.

Moreover, there is no Islamic-finance-enabling infrastructure in most of the countries where Islamic banking exists. In particular, there are no well-developed Islamic money market operations, except in Malaysia where a number of Islamic money market instruments are developed to allow Islamic banks to have access to liquidity management tools. But even there, a distinct Islamic monetary policy has yet to emerge. This lack of enabling infrastructure is a main reason for mimicking of conventional products in Islamic banking & finance.

It is argued that attempts to develop an Islamic monetary policy may pave way for creating the first vibrant Islamic money markets in the countries where Islamic banking is significant. Pakistan is one such country where Islamic banking is reaching 8% of the banking sector, yet there is huge dissatisfaction with the current Islamic product offerings, especially by the more conservative religious class that argues for a purist model of Islamic banking. Development of an Islamic monetary policy by the State Bank of Pakistan and implementing it along with its conventional monetary management may give rise to a dual monetary system – something that some people contend to be consistent with the dual banking system as it allows for the parallel operations of Islamic and conventional banks in a country.

It must be emphasised that the suggestion of a dual monetary system is not a far-fetched idea. In fact, there are living examples wherein a country has multiple currencies. In the UK, for example, apart from Bank of England, Bank of Scotland, Royal Bank of Scotland and some other banks issue their own pounds. Malaysia also provides another example, where apart from the main currency Ringgit issued by Bank Negara Malaysia (the central bank), the State of Kalantan also issues gold coins for some of its employees that may wish to be paid in this alternative currency. In fact, any country that allows holding of multiple currencies (as in the form of foreign currency accounts) is technically a multiple currency regime.

The open market operation in monetary management is based on the interest rate mechanism, which makes it clearly and unambiguously Shariah repugnant. Hence, there is a definite and clear-cut need for developing a monetary policy that is in line with the practice of Islamic banking and finance. This will require developing money market instruments that are not based on the interest rate mechanism but rather are based on the Shariah compliant principles and are consistent with the product offerings by Islamic banks. On a more philosophical level, this may lead to a need for creating an asset-based money rather than the current debt-based money.

KARACHI: Islamic banking in Pakistan is being practiced on the basis of supply and demand and not as mandatory by the government, said Jamiatur Rasheed Education Director Abdul Aziz Raja.

Addressing at a seminar on a case study on ‘A Blend of Contemporary and Religious Education’, held at Korangi Association of Trade and Industry (KATI), Raja said that banking ordinance was introduced in 1974 but tabled in the House in 1984, under which the Islamic banking in Pakistan should be mandatory and not the optional.

He said that under Supreme Court’s order Islamic banking should be enforced. “Islam is a complete code of life and not just for a few rituals and gives complete economic system,” said Raja adding that in order to implement Islamic banking and Islamic financial system only 5.0 percent work has been done in the country so far while 95 percent work is yet to be done.

He said that Jamiatur Rasheed has introduced various courses on Islamic financial system and economic principles and offer graduate and post graduate courses on banking and finance, accounting, book-keeping, supply chain and marketing, etc, and the campus constructed in Ahsanabad is most modern and equipped with all required facilities.

He pointed out that interest free banking is being practiced in Japan and a number of western countries while Pakistan’s businessmen are being charged with double-digit interest. He said that at this juncture when religious institutions have forgotten modern and technical education, Jamiatur Rasheed, which is imparting most modern education is an asset to the nation. He advised that like Jamiatur Rasheed other religious institutions should also impart technical and other modern education to their students.

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